Merkel’s Path: Brinkmanship for Debt Crisis

When the ratings agency Standard & Poor’s warned this week that it might lower the credit ratings of 15 euro zone countries, including Germany, Chancellor Angela Merkel seemed unmoved. “What a rating agency does is the responsibility of the rating agency,” she told reporters in Berlin on Tuesday.

John MacDougall | AFP | Getty Images

German Chancellor Angela Merkel

It was the kind of impervious reaction to market gyrations that many critics said was at the core of the euro crisis. Mrs. Merkel, they say, has rarely acted quickly or boldly enough to halt the downward spiral of the euro.

To American officials, Mrs. Merkel, 57, seems at times shockingly aloof about market turmoil. But as European leaders prepare for crucial meetings this week in Brussels, what may have seemed like timid or even bumbling leadership is looking more like a consistent strategy of brinkmanship aimed at remaking the euro zone in Germany’s likeness.

At critical junctures throughout the crisis, Mrs. Merkel has resisted appeals to appease the financial markets by lowering borrowing costs. Instead, she has wielded the pain of soaring interest rates as a cudgel to extract painful changes — and demand leadership changes — in countries like Greece and Italy that have proven resistant to those changes in the past.

It is a clever strategy, one that allows her to juggle divergent interests at home, where the German people do not want her offering more guarantees of taxpayer money to combat the sovereign debt crisis, and abroad, where they are begging her to do so. It is also highly risky.

If the euro is preserved and Europe moves toward a more unified future, Mrs. Merkel will probably win the lion’s share of the credit, perhaps one day being hailed as Europe’s savior. But if her prescriptions turn out to be inadequate, she could reap the blame for presiding over the collapse of the euro, with untold consequences for the world economy.

Either way, Mrs. Merkel, a steely champion of austerity and fiscal discipline, seems to have assumed the nickname of her 19th-century predecessor Otto von Bismarck: the Iron Chancellor.

Mrs. Merkel is in nearly daily contact with Obama administration officials who hope she will master the crisis — or, at the very least, win tacit approval for the European Central Bankto step in more forcefully — even though she deflects their demands for more aggressive action.

Treasury Secretary Timothy F. Geithner flew to Germany on Tuesday, meeting first in Frankfurt with the president of the European Central Bank, Mario Draghi, and the president of the Bundesbank, Jens Weidmann. He then spent an hour with Wolfgang Schäuble, his German counterpart, at the Finance Ministry in Berlin. Mr. Geithner said he was “very encouraged by the developments in Europe in the past few weeks.”

Mrs. Merkel’s leadership has come at a high cost for indebted countries, especially those on the periphery, with cuts in public spending biting just as joblessness has surged. Youth unemployment in Spain is nearly 50 percent, a fact Mrs. Merkel raises with domestic audiences when cautiously selling more intervention.

The treaty changes she and President Nicolas Sarkozy of France proposed in Paris on Monday would have been inconceivable at the beginning of the crisis, since it requires states to cede a significant degree of economic sovereignty. It is a process that many observers, in particular the populist British press, say is well underway. German dominance of the euro zone, they say — with Mrs. Merkel as the unofficial but unchallenged leader of Europe — has in fact already arrived.

Silvio Berlusconi’s resignation as Italy’s prime minister was interpreted as an omen for Europe’s German-directed future. And confidential draft proposals of Ireland’s December budget were found to have circulated among lawmakers in Berlin last month before opposition lawmakers in Dublin saw them.

Despite her global prominence, Mrs. Merkel, an East German physicist turned politician, cuts a modest figure in Berlin. She still lives with her media-shy second husband, a quantum chemist, in the same apartment in the central Mitte District that they lived in before she became chancellor. Her daily commute carries her across the former path of the Berlin Wall, a reminder of her years trapped behind it.

The future of the European Union could well be decided at this week’s summit meeting in Brussels. But a routine day in Mrs. Merkel’s schedule here in the German capital illustrates the unique demands on her, as both a leader who is the unlikely fulcrum of the world’s financial future and as someone who must play the role of legislator and party leader.

Last week, she gave a closely watched government address in the historic Reichstag building, where she compared the steps to strengthen the 17-member currency zone to a marathon.

A withering comment

Mrs. Merkel is not a charismatic speaker but she possesses a commanding air. At one point, a buzz of chuckles and chatter rose from the ranks of the opposition Green Party. Mrs. Merkel looked up from her notes, cast a glare at the murmuring politicians seated before her and said, “It appears to be incredibly funny to the Greens. To me, it’s incredibly logical. That’s just the difference.”

Her critics silenced, she continued. When the official transcript of her speech appeared, the withering aside was conspicuously absent, excised from the record.

After the speech, she sat with her fellow members of Parliament, listening to opposition leaders as they railed about her failure to stem the crisis. With the cameras off her for a moment, Mrs. Merkel yawned and slumped slightly in her chair, a rare down moment but one that did not last long. Soon she was holding a series of impromptu whispered discussions, speaking quietly to the economy minister and vice chancellor, Philipp Rösler, and Mr. Schäuble, her powerful finance minister.

After an hour and a half of working the room, she left to go record her weekly podcast, this week on the subject of energy efficiency, and to prepare to receive the chancellor of Austria, Werner Faymann. The two chancellors talked budgets and bailouts over a lunch of beef roulade in the penthouse dining room, joined by the governor of the Austrian National Bank, Ewald Nowotny, and others.

After a joint news conference with Mr. Faymann, Mrs. Merkel climbed into a black Audi sedan to race to the headquarters of her party, the Christian Democratic Union. She hustled past a table with copies of the magazine Silesia Today and the newspaper Süddeutsche Zeitung to address the party’s East and Central German Association, survivors of the forced migration from lost German territories at the end of World War II and their children.

With the ease of a big-city mayor stroking local constituents, Mrs. Merkel smoothly dropped a reference to the margin of re-election for the association chairman. She thanked members by name for their hard work.

Before the crisis began, Mrs. Merkel had the reputation of a caretaker chancellor, a politician who liked to give voters what they wanted and preferred not to create waves. “Perhaps a few of us thought that after German unification there would not be so much more to do,” she said. “We were wrong there.”